You may have heard that last Spring, in a ground-breaking decision, the California Supreme Court adopted the ABC independent contractor test, modelling it after Massachusetts’ contractor law, which is considered the strictest contractor law in the nation. The Dynamex decision created a simplified three-factor test, referred to as the “ABC Test,” under which the hiring party must prove that the prospective independent contractor is:
- A. free from the control and direction of the hiring party,
- B. performing services that are outside the core of the hiring party’s business, and
- C. engaged in an independently established trade, occupation or business which performs work similar to the work performed for the hiring party
While many states use the “A” and “C” prongs of this test, Massachusetts, New Jersey, and California are, to date, the only states that strictly adhere to all three. “B” is proving to be the most difficult requirement for hiring parties to meet (also known as the “B” Conundrum), and there was enormous backlash from many in the CA Silicon Valley tech industry. Independent contractor legislation by the federal and state agencies is like watching a ping-pong ball go back and forth – and it’s all over the place. It’s difficult to keep up.
As a result, best-practice for individuals or businesses hiring workers in California is to retain those workers as employees rather than independent contractors.
Retroactivity of Dynamex ABC Test
There have been post-Dynamex Independent Contractor classification developments concerning retroactivity of the Dynamex ABC Test. Denis Kenny, Attorney and Partner with Scherer Smith & Kenny LLP, says:
“The retroactivity of the Dynamex decision had, so far, only been addressed at the trial court level, with most courts finding that the ABC Test properly applies retroactively because the fundamental elements of the classification analysis did not change but, instead, clarified existing law. However, in a May 2, 2019 decision, Vazquez v. Jan-Pro Franchising International, Inc., the Ninth Circuit reaffirmed the trial courts’ majority view that Dynamex applies retroactively. Ninth Circuit decisions are not binding on California state courts but are viewed as persuasive authority. Consequently, unless or until a California appellate court rules differently, the Dynamex ABC Test should be used in examining California worker classification issues for the past, present and future.
Scope of Claims Covered by Dynamex ABC Test
Dynamex addressed the classification of workers bringing claims under IWC Wage Orders, but the Court did not expressly limit the scope of its decision to those claims. Consequently, Dynamex creates a legal landscape in which the same worker may be properly classified as both an employee and an independent contractor depending on the types of claims brought or examined. In practice, this type of legal inconsistency creates huge risks and uncertainties for businesses and workers alike. For example, how should a worker be classified if he or she does not pass the Dynamex ABC Test but does pass the Economic Realities Test, which is applied under federal law to ERISA, social security and other federal benefits?
Amidst this uncertain legal landscape and a highly divided and partisan political climate, California agencies and politicians have taken competing steps to expand or contract Dynamex’s scope.
At the agency level, on May 3, 2019, the Division of Labor Standards Enforcement (“DLSE”), California’s wage and hour enforcement agency, issued a letter opining that the ABC test applies to both the IWC Wage Orders and any Labor Code provisions that enforce requirements set forth in the Wage Orders. DLSE decisions are not binding on state or federal courts but they are examined and may be cited for persuasive authority and, of course, will apply to wage claims adjudicated by the DLSE.
On the legislative front, California Assembly Bill (“AB”) 5 was introduced by Democratic state Assemblywoman Lorena Gonzalez in December 2018, seeking to codify the Dynamex ABC Test into California’s Labor Code and expand its scope by making it applicable to a panoply of employment laws including paid family leave, expense reimbursement, workers’ compensation, and health and unemployment insurance. Ms Gonzalez has said in a statement supporting AB 5:
“Individuals are not able to make it on three side hustles. That shouldn’t be the norm. That shouldn’t be accepted . . . In a state with one of the country’s highest poverty rates, this court decision is crucial to helping Californians maintain solid employment in an economy that’s left millions struggling.”
Conversely, Republican state Assembly woman Melissa Melendez sponsored a competing bill in December 2018, AB 71, that seeks to reverse the Dynamex ABC Test and have it be replaced with the multi-factor Borello test that applied before Dynamex.
AB 5 and AB 71 remain in the consideration stage. We will continue to monitor these and other developments in this dynamic legal arena.”
Update on AB 5: On 5/29/19 California’s state Assembly approved Assembly Bill 5 which codifies a recent court decision to use the more strict ABC test for determining independent contractor status; the decision is also known as the “Dynamex decision.” The bill, which drew concerns from gig economy firms, will now go to the state Senate.1
If your organization needs some help ensuring that you are ready for the IC Compliance changes, ClearPath Workforce Management risk mitigation services bridge the gaps to enable compliant engagement of this highly skilled talent and to expand your talent supply chain. ClearIC™ can automate and simplify the Independent Contractor evaluation process while mitigating your risk via our full-service IC vetting process. Contact ClearPath for a complimentary 1:1 review of your current worker status.
ClearPath has partnered with Scherer Smith & Kenny LLP since 2001. We highly recommend this firm, as they are easy to work with and very responsive. If you have any legal questions, you can contact Denis Kenny at email@example.com, Ryan Stahl at firstname.lastname@example.org, or John Lough, Jr. at email@example.com.